Key Points To Understand About Gold Loan Interest Rates

The demand for gold loan is growing in the market because of the easy loan process and less time consuming. But having a knowledge about interest rate is useful before availing a gold loan. Read to know in detail.

23 Sep,2022 11:04 IST 8 views
Key Points To Understand About Gold Loan Interest Rates

For centuries, Indians have used their household gold jewellery to borrow money whenever required to meet either their planned expenditures such as a wedding in the family or an unplanned expense such as a health emergency.

The popularity of gold loans is only growing as the value of gold increases over time and as the market turns more organised and more and more banks and non-banking finance companies enter the segment.

And now, with the advent of online lending, it’s easier than ever to take a gold loan. Growing competition also means borrowers can shop around and take a loan from a lender with the most competitive interest rate.

But before finalising a loan, a borrower must know certain things about interest rates on gold loans.

Interest Rate Methods

Banks and NBFCs charge a wide range of interest rates on a gold loan depending upon many factors. In general, banks charge a lower rate than NBFCs but both offer far lower rates than pawn shops and local moneylenders.

Lenders follow broadly two different methods to calculate the interest rate itself. While some lenders charge a simple interest rate, others offer loans on compound interest.

In simple interest, borrowers pay interest only the amount borrowed. However, in the case of compound interest, borrowers pay interest both on the principal sum as well as on the interest accrued on the borrowed amount. So, loans with compound interest are costlier than those with simple interest, unless the actual rate is lower.

Another thing that borrowers must check is whether the interest rate is fixed for the duration of the loan or is floating and liable to change based on certain factors.

Factors That Affect Interest Rates

The interest rate is determined at the time of approving the loan. While lenders may mention a wide range of rates on their websites, from less than 10% to more than 30%, many aspects affect the actual rate offered to a borrower.

• Loan Amount:

A higher loan amount could mean a higher rate of interest, pushing up the cost of servicing.

• Gold Purity:

Lenders typically accept gold with 18 carats and above to grant a loan. Gold jewellery made of lower purity carriers a higher interest rate and vice versa.

• Income:

Most lenders consider the borrower’s monthly income to ascertain their repayment capacity and adjust the interest rate accordingly. A borrower with high monthly salary or cash flow via other source of income can get a lower rate than a borrower with a low income.

• Credit Score:

The credit score isn’t a factor in approving the loan but it does play a part in deciding the rate of interest. People with a credit score of 700 and above get a lower rate than those with weaker scores.

Conclusion

The interest rate on gold loans depends on several factors and varies widely. These parameters include the amount and duration of loan, the purity of the gold jewellery being kept as a collateral, as well as the credit score and monthly income of the borrower. So, borrowers with the same amount of gold jewellery can get different rates from the same lender if there is a difference in the credit score or income profile.

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